Flip Unitrusts

A Flip Charitable Remainder Unitrust provides the flexibility
necessary for some assets by combining aspects of a
net income unitrust and a regular unitrust. It is an
excellent approach for people with illiquid or unmarketable
assets to fund a trust that will make an irrevocable
commitment to their favorite charity (or charities).

The IRS created the Flip Unitrust in 1998. The regulations
permit the trust to function without paying any income
to the trust beneficiary (or beneficiaries). After a
predetermined event, such as the sale of the asset funding
the trust, the Flip unitrust "flips" (becomes) a regular
unitrust on the following January 1st. Since the asset
in this case has been sold, the trustee may invest in
income-producing assets for the trust and may begin
making regular income payments to the beneficiary (ies).

For
example, Mary Jones owned real estate that she inherited
some twenty years ago from her parents. Her cost basis
was only $10,000, but the development land had appreciated
dramatically and had a current fair market value of
$300,000. She and her advisor discussed options and
the idea of a trust that would pay her 7% each year
was very attractive to her. It also enabled her to provide
a large charitable gift for a charity that was very
meaningful to her, something she had hoped she would
be able to do.

Her advisor helped Mary transfer the $300,000 in property
to a FLIP unitrust. The FLIP unitrust document the advisor
drew up specified that the trigger event would be the
sale of the property. Until the trust had sold that
property, the unitrust remained a net income trust.
Since there was no current income from the property,
the trust did not pay any income to her.

On January 1st after the trigger event, the trust
"FLIPed" and became a standard unitrust.

Over Mary's lifetime, her advisor estimates the trust
will pay out over $440,000. Based on actuarial and income
assumptions, when she passes away, the $300,000 trust
will have grown to $420,000. Mary will receive a steady
income for her lifetime, with about two thirds of the
payouts taxed at favorable capital gain rates. She also
avoided an immediate capital gain tax of $43,500 and
perhaps saved some potential estate taxes by removing
the property from her estate. And, she had the joy of
knowing and informing her favorite charity that a significant
gift had been made that they could look forward to.

A flip trust provides flexibility for donors with hard
to value or illiquid assets. A flip trust can be managed
so that illiquid assets may be sold in a tax advantaged
manner, the proceeds reinvested in a balanced portfolio
and life income payments received by the donor and/or
other beneficiaries.

There will probably be expenses associated with a trust,
especially a trust involving real estate (taxes, insurance,
maintenance for example). The donor should recognize
that prior to the trust generating income, the donor
may need to make additional gifts to the trust in anticipation
of the expenses.

There are many different types of events that can trigger
the flip. The event cannot be discretionary and must
be specified in the trust documents. Examples of some
events that could be used to trigger a flip are:

Please note, individual financial circumstances will vary. The information on this site does not constitute legal or tax advice. Donor stories and photographs are for purposes of illustration only. As with all tax and estate planning, please consult your attorney or estate specialist. All material is copyrighted and is for viewing purposes only. Use of this site signifies your agreement with the terms of use. The content in this Planned Giving section has been developed for KUCO and is owned by Future Focus. Please report any problems to webmaster.